ON ECONOMICS
Happy anniversary?
100 YEARS WITH PERSONAL INCOME TAXES AND CENTRAL BANKING
e
ven after the contentious political campaigns last
fall, still hardly a day goes by without some mention of a proposed change in taxes or government
spending, a warning about looming deficits anddebt, or the efficacy of Federal Reserve (Fed) interventions to revive our sluggish economy.
These front-page headlines and evening-news
accounts, like clutching our Starbucks beverage or cell-phone, would
have been totally foreign to life in this country 100 years ago.
1913. With Delaware’s ratification on February 3, 1913, we added
the 16th amendment to the U.S. Constitution: “The Congress shall
have power to lay and collect taxes on incomes, from whatever
source derived, without apportionment among the several states, and
without regard to any census or enumeration.” Thus after some 19th
century fits and starts, the nation now had a personal income tax.
Subsequent emendations have included adding the payroll (FICA)
central banking again and established The Second Bank of the
tax in the 1930s to fund Social Security, tax withholding in the
United States; it became an election casualty in 1836. So from 1836
1940s, establishing April 15 as “tax day” in 1955, indexation for into 1913, the economy operated—“the freeflation in the 1980s, and periodic changes in
banking
era”—without a central bank.
the tax base and marginal rates.
President Kennedy once remarked
On December 23, 1913, President Woodrow that the only way he could remember
1913-2012. Although the 16th amendment
Wilson signed into law the Federal Reserve
what the Fed did was because
was
added in 1913, Americans became
Act: “To provide for the establishment of
“money” and “Martin” (William
starkly aware of it about 30 years later with
Federal reserve banks, to furnish an elastic
McChesney Martin, his Fed chair)
the revenue needs to finance World War II
currency, to afford means of rediscounting
both started with “M.”
commitments. And except for four years
commercial paper, to establish a more effec(1997-2001), the federal government has run
tivesupervision of banking in the United
budget deficits from 1970 to …
States, and for other purposes.” Thus, also after some prior missteps,
Central banking has received its share of knocks over time. Milton
we now had a central bank with uniform paper money – Federal ReFriedman and Anna Schwartz, in A Monetary History of the United
serve Notes (“legal tender for all debts public and private”).
States, blamed the Fed for the severity of the Great Depression of the
Subsequent changes on the monetary side have included deposit
1930s. They and other scholars also put the onus for the 1970s’
insurance and some controversies with the Bank Act (including
stagflation at the Fed’s doorstep.
Glass-Steagall) in the 1930s, cutting ties between the dollar and gold
President Kennedy once remarked that the only way he could rein the early ‘70s, bank deregulation in the early ‘80s, and the
member what the Fed did was because “money” and “Martin”
Dodd-Frank Act plus various
BY ALLEN R. SANDERSON
(William McChesney Martin, his Fed chair) both started with “M.”
“QE” (quantitative easing)
Today, immediate past chairmen, Paul Volcker and Alan Greenspan,
rounds to address 21st-century economic crises.
and current incumbent Ben Bernanke, are almost household names,
With these two 1913 legislative initiatives, the basic framework
and the Fed chair is considered by many (though not by Grover
for taxation, the financial sector and the conduct of fiscal and
Norquist nor the heads of SEIU or AARP) to be the second most
monetary policy was set.
powerful person in Washington.
1776-1912. In the 19th century, tariffs, land sales, and excise taxes
2113. Other than for one constant—the Cubs will still be chasing
provided the bulk of revenue for the federal government. Courts
that elusive World Series championship—predicting 100 years out is
ruled unconstitutional attempts to create a tax on incomes. As late as
a parlor game at best, though for sure there will be no paper money,
1912 the average American paid under 10 percent of his/her income
but perhaps one worldwide central bank and a common currency—
to the federal government; today, depending upon one’s definition,
the DEY (dollar, euro, yen/yuan)—with periodic yearnings to return
we send about a quarter of our earnings to Washington, and the perto a gold standard.
sonal income tax is the largest source of revenue, followed by the
On the fiscal side, there will be the occasional push to require a
payroll tax and, more recently, issuing debt (aka borrowing).
Two years into our new nation, we created The First Bank of the
balanced budget, perhaps a less complicated tax code, and, of course,
United States, with a 20-year charter (1791-1811); in 1816 we tried
learning how to say ‘Thank You’ in Mandarin Chinese. o
20 chicagolife.net